Investment Strategy
We seek to pick winning funds with superior management and quantitative characteristics linked to strong performance. Our quantitative research uses the most comprehensive mutual fund database in the world to determine the best strategies for long-term investing success. We then supplement those studies with extensive qualitative research of portfolio managers, analysts, and traders through onsite visits and follow-up phone calls.
 
About the Editor
Russel Kinnel is director of manager research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors. He also writes the Fund Spy column for Morningstar.com, the company's investment Web site.

Since joining the company in 1994, Kinnel has covered the Fidelity, Janus, T. Rowe Price, and Vanguard mutual fund families. He helped develop the new Morningstar Rating for funds and the new Morningstar Style Box methodology. He also is co-author of the company's first book, The Morningstar Guide to Mutual Funds: 5-Star Strategies for Success, which was published in January 2003.

 
 
Apr 23, 2018
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About Russel Russ' Photo
Russel Kinnel,
Director of Manager Research and Editor, Morningstar FundInvestor
Russel Kinnel is director of manager research for Morningstar, Inc. and editor of Morningstar FundInvestor, a monthly print newsletter for individual investors.
Featured Posts
Trust the Process

From the desk of managing editor Jason Kephart, CFA

This week, the Philadelphia 76ers won their first NBA Playoff game since 2012. During its drought, the team focused on purposefully losing to try to get high draft picks and secure the most talented players. It was a method coined “The Process.” We would never advocate for a mutual fund manager who was actively trying to underperform, but, as we noted last month on Morningstar.com, stretches of underperformance are a feature of active management. An active manager’s process can shed a lot of light on what’s driving the underperformance. Morningstar Analyst Ratings assign Positive ratings for Process to mutual funds that we believe have an enduring competitive edge versus peers. That doesn’t mean the process will always lead to outperformance, but trust in the process and results should be beneficial in the end. Below are three funds with Morningstar Analysts Ratings of Gold and Positive ratings for Process that have underperformed peers over the previous five years (roughly as long as the 76ers’ playoff drought).
FundTickerMorningstar Analyst RatingMorningstar Category5 Yr Total Ret 5Yr% Rank
Cat
Vanguard Dividend Growth VDIGXGoldLarge Blend11.5465
FMI Common StockFMIMXGoldMid-Cap Blend10.1465
AMG Yacktman YACKXGoldLarge Blend9.3190
ClearBridge Aggressive Growth SHRAXSilverLarge Growth10.6490
LKCM Equity LKEQXSilverLarge Growth10.6191

Morningstar direct, data as of 3/31/18

 

Vanguard Dividend Growth’s VDIGX Donald Kilbride looks for companies that have proved willing and able to increase their dividends over time but that are trading at reasonable prices. Ideally, he wants firms that can grow their dividends at the rate of inflation plus 3%. That often leads to large blue-chip stocks with a Morningstar Economic Moat Rating of either wide or narrow, like top holding Nike NKE. A drawback to focusing on well-capitalized dividend-payers is they are likely to lag when more-speculative fare surges, like the recent growth-led rally in U.S. equities.

FMI Common Stock FMIMX is another valuation-conscious strategy that has lagged in recent markets. The managers look for companies with durable business models and strong management that generate superior profitability through a full economic cycle. It only buys stocks trading at a minimum one-third discount to their estimated intrinsic worth in a five-year holding period. The conservative approach has mostly shone in market downturns. In the first quarter of 2018, for example, the fund lost 0.26%, holding up much better than the category average of a 1% loss.

AMG Yacktman’s YACKX discipline has helped it out over the long term, but recent results relative to peers have suffered as managers Stephen Yacktman and Jason Subotky refuse to chase stocks in what they consider to be an expensive market. The fund’s 25% stake in cash, as of the end of March, has led to much of the fund’s missed upside over the past five years. The cash also provides the managers dry powder to go shopping when stocks do become cheaper in their view. Performance is likely to continue to be a slog as markets rally higher. Much like the 76ers’ journey back to the playoff success, even the best manager can experience some short-term pains. Trust in the process, however, should benefit patient investors over the long term.

Remembering Famed Value Investor Marty Whitman
Third Avenue Management Founder Marty Whitman died on Monday at age 93. Find a collection of commentary on the legendary value investors’ career on Morningstar.com.

John Rekenthaler Opines on the Benefits of Investing Simply
“The whole idea of long-term investing is to align one’s portfolio with the odds. That means: 1) Holding securities that figure to outgain cash more often than not, and 2) Keeping costs very low while doing so. That sounds so obvious as to be useless. Yet many fail to observe those precepts.” Find the whole column here

Active Share Is Back in the Spotlight
New York Attorney General Eric Schneiderman recently announced that 13 fund companies had voluntarily agreed to disclose a measure called "active share" to retail investors. Here’s head of Morningstar Manager Research Jeffrey Ptak on why investors shouldn’t let active share be too much of a guiding force when choosing funds, although it can be useful. 
 
 

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